Soapbox: One Certainty For 2023

Watch out for the ‘R’ word this year – R for Recession.

Kristalina Georgieva, managing director of the International Monetary Fund (IMF) reckons a third of the global economy will be in recession this year and that 2023 will be tougher than last year. There’s no escape – China, the European Union and the US are all slowing simultaneously.

Who is to blame? Leading candidate is China’s President Xi Jinping. Poor President Xi – he can’t get it right. China’s zero-Covid policy, promoted by President Xi from very early in the pandemic, meant that lockdowns sprang up countrywide during 2020-22, disrupting global supply chains and exacerbating inflation everywhere; it could hardly be otherwise given that China is responsible for almost 20% of global gross domestic product (GDP). As workers were forced to stay at home, supply of goods fell – and their prices rose.

And now, after that zero-Covid policy was hastily abandoned towards the end of last year , the Covid virus and variants thereof are ripping through China and disrupting supply chains as companies experience labour shortages.

According to Georgieva “for the next couple of months, it would be tough for China, and the impact on Chinese growth would be negative, the impact on the region will be negative, the impact on global growth will be negative,” she said. Rather than pushing global growth, China is likely to be a drag on it. “This has never happened before”, said Georgieva.

Permacrisis

That was last year’s word of the year, according to the Collins English dictionary. 2022 was exhausting, almost from the word go. Yet despite widespread predictions of a US recession thanks to higher interest rates, the much-predicted 2022 recession has been pushed back into this year – if indeed it happens; not everyone agrees with the IMF’s boss.

The relentless raising of US interest rates may not have caused a recession (conventionally defined as two consecutive quarters of decline in economic activity) but for investors in stocks, bonds, and cryptocurrencies 2022 the higher rates was highly damaging.

Last year long-term US government bonds suffered their biggest drop since 1788. For bonds and equities, it was the worst performance since 1932. At its lowest point in 2022, the S&P 500 index had shed $11 trillion in market capitalisation: similar to the entire annual economic output of Germany, Japan and Canada combined. Tech stocks alone lost an amount equivalent to the output of France or the UK.

For cryptocurrencies, 2022 ended on an especially sour note. Research published in late December by the prestigious National Bureau of Economic Research (NBER) in the US found that the ‘wash trading’ on each unregulated crypto exchange “averaged over 70% of the reported volume”.

Wash trading is a form of market manipulation, in which a trader or traders buy and sell the same security simultaneously, giving a misleading impression of activity. It’s illegal and certainly immoral. The NBER paper found that “trillions of dollars annually” are washed. This may just confirm suspicions but in any case, is unlikely to deter crypto evangelists. It may also help stimulate a ‘non-prediction’ for 2023 by TS Lombard, the forecasting consultancy, which “humbled by the silliness of real life” suggests that a new cryptocurrency called LOLcoin “will emerge and quickly gain popularity, prompting many people to invest their life savings in it.”

Where to turn?

2022 was an awful year for investors in most assets, including property. In the US new mortgage applications in Q3 of 2022 were down 47% year-on-year ; in the UK house prices fell by 2.3% month-on-month last November, the biggest drop since 2008. In Sweden home values have drop by 15% from their peak early in 2022 ; German house prices were forecast by Deutsche Bank at the start of December to drop by up to 25%

So where could you have turned to, to protect your wealth?

Perhaps look to central banks, which accumulated more gold than at any time in the past 55 years. It’s almost as if central banks were laying in stores for an expected coming storm. Some analysts see the bigger central bank gold-buying as delivering a pointed message – they don’t want to be too exposed to the US Dollar. Russia’s central bank had more than $150 billion of US Treasuries in 2012; today it’s around $2 billion, while its gold holdings have risen to more than 1,350 tonnes.

And while most other asset classes nose-dived last year, gold held onto, and even managed to increase, gains achieved in earlier years. In US Dollar terms the gold price in early January 2022 was $1,795.19 an ounce; on 1 January this year it was $1,823.70, a modest gain of almost 1.6%. In Pound Sterling terms the gain over the same period was even more marked, at 14.5%. This was a remarkable achievement, given that the US Federal Reserve pushed interest rates to their highest level for 15 years, to a range of 4.25%-4.5%, strengthening the Dollar. A stronger Dollar usually tends to depress gold prices; so the question is, what might the gold price have been if the Dollar had not been so strong? That counter-factual is obviously impossible to answer.

When might the Fed end its rate hikes? Not this year if it’s true to its word from last December; it will continue to raise rates to around 5%-5.25%. The earliest we can currently expect rates to fall is in 2024.

Inflation still plagues the sleep of those in charge of economic policy in the US, even though the consumer price index (CPI) has now dropped to 7.1%, compared to 10.7% in the UK. It’s still a very long way from the ‘target’ of 2%, however – and policymakers are determined to stamp inflation out, which is why they will continue to push up interest rates until a recession threatens.

Inflation is blamed on different things; Covid, supply chain disruptions, the Russian invasion of Ukraine are regularly trotted out but the underlying reason – the massive increase in the money supply in the worst days of Covid – is as equally regularly forgotten. Between 2018 and the start of 2022 the M2 measure of money supply (which includes fiat currency, savings deposits and shares in retail mutual funds) rose from almost $14 trillion to above $21 trillion, where it remains today. The last recession, February to April 2020, saw US unemployment exceed 14%; more than 24 million Americans lost their jobs. It’s different now – the US jobs market remains very strong with average hourly earnings up by around 5% year-on-year. The US economy is still running very warm if not hot; the risk for 2023 is that the Fed will continue to tighten money supply beyond what’s necessary and put the country’s economy into recession – when it will start to lower interest rates and might even feel the need to provide more ‘stimulus’ money to voters in what will be a Presidential election year. In the UK the signs of recession are gathering fast; shop closures hit their highest in five years in 2022, around 47 a day.

It’s going to be another bumpy year.

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.